Just last month, Boris Johnson had bragged that the UK has “the fastest growing economy in the G7”. The post-pandemic bounce came earlier to Britain than most. But that ebullient performance seems to have left the party-going premier with a nasty hangover: the IMF now forecasts that, in 2023, the UK will have the slowest growth rate of the seven.
Output growth this year will come in at 3.7 per cent. Next year, though, it forecasts a drop to 1.2 per cent. This is around half of the IMF’s forecast for the growth rate of the average advanced economy. The IMF’s view is that “consumption is projected to be weaker than expected as inflation erodes real disposable income”. Inflation is high everywhere — a consequence of the ending of pandemic restrictions, plus the war in Ukraine. But, according to the IMF, price rises will be a major problem for longer in the UK than elsewhere. And high interest rates, raised in response to those surging prices, are “expected to cool investment”.
It is not wise to read too deeply into the particulars of the current position: the emergence from a global pandemic and the start of a war on its continent are unique circumstances. But it is hard to ignore one more permanent truth: the UK has a serious long-term problem with economic growth. The country has not solved its so-called “productivity puzzle”.
Since the financial crisis, the country’s economy has failed to get up a head of steam. The mean annual growth rate from 1948 to 2008 was 2.7 per cent. Since then, it has been a little under 1 per cent. Weak growth is critical to understanding the country’s politics. The UK’s long period of fiscal austerity after 2010 was a response to the UK having a smaller tax base than it was planning on. The misery was compounded and prolonged by the economy’s inability to grow strongly.
Opposition politicians have, for a decade, sought to capitalise on annoyance about anaemic wage growth. It was not until 2019 that the country’s average wages had returned to the levels of 2008. Young people, in particular, face miserable pay and high housing costs. Again, this is a story about what happens when output stalls.
The country’s leaders, however, have not focused on restoring growth. On the contrary, Johnson was elevated to prime minister because of his support for Brexit, a decision that has further hampered output. The Centre for European Reform, a think-tank, estimates that UK trade in goods is down by around 15 per cent due to Brexit.
One concern underpinning the IMF’s forecasts is that the UK’s planned corporate tax rises may constrain the UK’s growth in 2023: corporation tax is set to rise from 19 per cent to 25 per cent. At the same time, the British government will be withdrawing the so-called “super-deduction” — a generous pandemic relief for capital spending.
The Treasury is already consulting on a replacement measure to encourage businesses to keep on investing: one cause of weak UK growth is a lack of business investment. It is important that, whatever comes next, there is adequate support for business investment — a long-term weakness of the UK, even before the crash.
A robust pro-investment tax measure should be a relatively easy win for the Treasury — it has the tools and there is no lobby standing in its way. But that makes it rare: many of the UK’s other growth problems, whether its distance from the European single market or the country’s restrictive planning laws, will take serious political capital to fix. So long as the UK’s politicians are indifferent to its growth problems, they will not be fixed.
Source: Economy - ft.com
